STRATEGY

LEARNING OBJECTIVES At the end of this chapter you should be able to:

• Explain the strengths and weaknesses of the various approaches to strategy and how
they interact.
• Assess the uses of strategy in different organizational contexts.
• Use simple models to assess the general and immediate competitive environments of an
organization and demonstrate the limitations of such models.
• illustrate the links between strategy, goals, structure, ownership, size and culture at the
level of the firm.
• Explain the concepts and assess the value of resource analysis, core competence, value
chain and portfolio analysis.
• Explain the various kinds of strategic option and demonstrate the basis for the selection
of a particular strategy in different situations.

I WHAT IS STRATEGY? I
Strategy has been defined as simply:
. . . th e long-term direction of the organization.
(Johnson , Wh itt ington and Scholes , 2012 , p . 2)

281
282 CH APTER 8 STRATEGY

a nd as:
... the determin.i tio n of l0 11g- nm goa ls a n d o b ;ectiues o f an enterprise and th e a d o p tion of
courses of .:ictio n an d th e alloca tio n o f reso11,-ces necessa ry fo r ca rrying o ut th ese g oals.
(Chan d ler, 1962. p. 3)

In C hapter 6 " ·e exa mined orga nization a l goal s. Altho ugh th ere is so me ove rl a p between
them, strategies a nd go al s are linked in vvhat some refer to as a hierarch y of intenti ons, whi ch
ca n co rn pn se :

• a vision setting out the overall future intentions of the organization

• a mission statement, which sets out the organization's core values
• goals as broad statements of intent
• strategies refine the goal setting process by determining what needs to be done to ach ieve
the goals
• objectives are the specific intentions identified by the strategy, the level of achievement of
which can be measured within a specific time.

Strategy contains a number of interrelated elements:

• It involves consideration of changes in the business environment that bring about opporru-
n ities and pose threats.
• It is concerned with the assessment of the internal strengths and weaknesses of the institu-
tion and, in particular, its ability to respond to those opportunities and threats. In this way
strategy can be seen as a linking process between the environmental, organizational and
functional components of the Business in Context model.
• It is the product of a decision making process influenced by the values, preferences and
power of interested parties. We examined some of the issues involved in this in our discus-
sion of management in the previous chapter.
• It is concerned with generating options and evaluating them.

Strategy is, therefore, an all embracing term dealing with goals and objectives, the firm 's envi-
ronment, its resources and structure, the scope and nature of its activities and ultimately rhe
behaviour of its members. Given the large number of variables involved and the considerable
subjectivity of the decision making process, strategy formulation is a very complex process. The
approach used by management texts (including, to a certain extent, this book) is to reduce such
complexity to a series of steps. While this is understandable, it can both oversimplify and give the
impression that strategy formulation is a logical process. It isn't. Strategy is both logical, sequential
and deliberate as well as emergent and responsive: a complex balance for the manager to achieve.
In thi s chapter we deal with the elements of strategy and attempt, wherever possible, to draw
attention to the more subjective and political aspects. We begin by examining the narure of
strategy, through the way strategy is formed. We refer to this as the strategic process. We then
look at the contexts in which strategic decisions are taken, and go on to identify the environ-
mental and organizational aspects of management strategy. We end the chapter by examining
comm on strategic option s, with a brief look at the criteria for strategic choice.
M ost strategies in most organizations originate from the management group. The concepr
crop s up in man y guises and is sometimes referred to as business policy, corporate strategy,
bu sin ess strategy, corporate planning, and so on. While there is significant overlap between s uch
 THE STRATEGICPROCESS 283

concepts a nd similar approaches are used, we can differentiate between corporate strategy, busi-
ness strategy and functional strategy.
• Cor~orate st rategy deals with decisions about the organization as a whole. In diversified
multi-product companies, it is the overall strategy that covers all activities. The corporate
strategy of a firm like Samsung or a university such as University College London will give
direction and aim to add value to the entire organization. Corporate level decisions can
include whether to enter a new market, whether to expand the organization by acquisition
and decisions about the total range of products and services.
• Business strategy deals with decisions that are linked to specific products and markets that
can be differentiated from other products and markets in the same organization. Decisions
at this level are about competing in a specific product market. Such strategies can apply to
stand alone businesses as strategic business units (SBUs). Business strategies in Samsung
would apply to specific product areas such as televisions or mobile phones or even specific
geographic markets. In University College, each department such as dentistry or manage-
ment would have its own business strategy. Obviously, business strategies should relate to
the overall corporate stra tegy.
• Functional strategy is concerned with the va rio us activities of business; innovation, opera-
tions, marketing, HRM, and fin ance and accounting. Th e functional strategies of each of
these activities determines how th ey will deliver th e corporate and business strategies.
Additionally, the alignment of business strategy and its attend ant orga nizational practices, pro-
cesses and structure needs to be balanced with th e IT strategy and its infrastructure and processes.

I THE STRATEGIC PROCESS I

Approaches to strategy
An examination of how strategy is formed gives us insights into the nature of strategy itself. We
identify five approaches, which we ha ve termed ra tional, flexibl e, creative, behavioural , incre-
mental, and a sixth which suggests that some managers operate without a conscious strategy.
We deal with each in turn.

KEY CONCEPT 8.1 THE STRATEGIC PROCESS

The strategic process refers to the way in which management strategy is formed . In most organizations this
involves a mixture of scientific and rational analysis together with more subjective and political considerations .

The rational approach

This is the classical approach to strategy and is typified by the work of Ansoff (1968) , Andrews
(1971) and Porter (1980, 1985). Strategy formulation is portra yed as a scientific and rational
process, assisted by techniques such as technological forecasting, portfolio analysis, environmental
impact analysis and sensitivity analysis. The aim of such techniques is generally profit maximiza-
tion. The rational approach owes much to the development of contingency theory. In Chapter 1
we noted that the contingency approach stressed the importance of a strategic fit between the firm
284 CHAPTER 8 STRATEGY

and its environment. Analyses a re made of a fi rm's environment to assess likel y opportunities and
threats, and of its intern a l reso urce position to identify strength s and weaknesses. This process is
sometimes referred to as SWOT analysis, an acronym for strengths, wea knesses, opportunities and
threats. The development o f SWOT is attributed to Kenn eth Andrews of Harvard Business School
(Andrev,,s, 1971). An illustration of the kind of analysis that can be made is offered in Figure 8.1.

FIGURE 8.1 An analysis of the strengths, weaknesses, opportunities and threats of SWOT United,
a Second Division football club
'

-- ---------------- - --
Opportunities i Threats '
i

• Promotion to other divisions • Seven other professional clubs

operating in a 25 mile radius
• Increased revenue from success in cup
competitions • Rising costs of wages and transfer
fees, bank interest charges, policing,
• Sale of town centre site and
equipment
redevelopment on the outskirts
• Local authority refusing planning
• Development of a membership squash
permission for a new ground and any
and rackets club and fitness centre
other development
attached to the ground
• Use of ground for other functions, • Best players may leave
e.g. rock concerts • Competition for spectators' time and
money from other sources, e.g. TV,
• Development of retailing activities
cinema, shopping, DIV
• Further development of women's team,
attracting new spectator groups • Increased levels of unemployment in
the area and less disposable income

-- - - ----~~~------- ------------~
Strengths Weaknesses

• The club owns its own ground and car • Cannot break even
parks in a good town centre site • Losses are supported by donations
• Good housekeeping and relatively low and loans from the chairman and a
wages large bank overdraft
• 2000 loyal supporters • Ground facilities in poor order,
• A successful and well established especially seating and toilets
youth development policy • Insufficient funds to invest in higher
wages and transfer fees
• The image of a family friendly club
• A relatively small population to support
with good connections
so many clubs in close proximity
• Poor image compared with many other
clubs in t_he area especially a recently
promoted Premier League team

There are disadvantages with this kind of approach:

• It assumes that ~nfo~mation is readily available to the strategist and an accurate assessment
can be made of its likely effect on the firm. In reality, knowledge is often imperfect.
• The environment ?~
modern business is often complex and dynamic. This makes assess-
ment of opportunmes and threats difficult.
 THE STRATEGIC PROCESS 285

• Complexity and lack of information do not just apply to the environment. Managers can
often be unaware of the real strengths and weaknesses of their own organization.
• In scanning the environment, managers are often collecting the same information as rival
firms. As a result, similar strategies occur and there may be a lack of truly innovative solu-
tions. The focus is on the environment rather than on the creation of distinctive compe-
tences and on the needs of the individual customer.
• The process of making decisions becomes both subjective and political, attracting the criti-
cism of being pseudo-science.
Despite these criticisms, the rational approach can be useful in that it collects relevant data, it
can give direction, it has face validity and, as Whittington (2000) argues, it can serve as a form of
group therapy. The approach is popular and is the basis of many texts. It can be a useful starting
point, provided managers are aware of its limitations.

KEY CONCEPT 8.2 SWOT ANALYSIS

SWOT stands for strengths, weaknesses, opportunities and threats. It is normally associated with more rational
approaches to strategy formulation, but perhaps its greatest contribution lies in providing the management
strategist and student of business with a framework for analyzing the position of a firm at a particular time. It can
also be useful in the development of strategic options which attempt to tackle opportunities and threats, build
on corporate strengths and avoid weaknesses. The challenge is to remain objective in appraisal of the strengths
and weaknesses of the organization as well as being realistic about the opportunities and extent of the threats.
An important consideration is that for most management there is a choice of strategy and SWOT analysis pro-
vides a starting point for consideration of those choices.

In the 1960s and 1970s the emergence of an increasingly complex and turbulent business
environment called for modifications in the rational approach.

The flexible approach

The complexity and volatility of the environment may mean that ·a detailed SWOT analysis is
both difficult and inappropriate. Profit maximization may be an inappropriate strategy. The
environment may be changing so rapidly that many of the historical and current data are mean-
ingless. This kind of situation led the oil companies, such as Shell, to adopt a different approach
to strategy formulation known as scenario planning. The approach recognizes that uncertainty
can never be eliminated, but it can be reduced by plotting scenarios, each responding to different
visions of the future. Managements are therefore prepared for a number of possible changes that
may occur. Writers such as Williamson (1991) argue that, under such conditions, the best that
managers can hope for is to maximize the chances of survival by cutting costs to become more
efficient (survival of the fittest) and by playing the market. A good example of the latter is offered
by Whittington (2000) citing Sony, who, in the 1980s, produced 160 different models of the
Walkman for the US, but kept only about 20 models on the market at any one time (survival of
the most popular). Others argue that this approach is wasteful and that attention should be paid
to understanding the needs and want of the consumer, the difficulty here is that the consumer
may not know what they need and want until it becomes available. Sony's initial estimates for
the size of the Walkman market was a few thousand, ultimately the device changed the way the
world listened to music and millions of them were sold globally.
286 CHAPTER 8 STRATEGY

The creative approach

This takes the flexible approach one step further by stressing the importance of imagination in the
strategic process. The idea that such an approach to strategy formulation is actually better has been
taken up by management writers in the 1980s. Peters and Waterman believe that the more formal
approaches to strategy formulation with the emphasis on complex environmental and organizational
analysis can lead to 'paralysis through analysis' (Peters and Waterman, 1982, p. 31). Managers using
the rational approach to make strategic decisions in a specific product market will invariably have
access to precisely the same information as their competitors. The resulting strategies are often too
conservative, insufficiently adventurous and are similar to those of competitor companies and as a
result too slow to recognize and respond to environmental change. A creative approach offers more
chance of achieving competitive advantage. Moreover, the more complex and changing the business
environment and the more difficult the problems facing managers, the more creative they need to be.

The behavioural approach

There is strong support for the view that strategy formulation is far from being a rational, logical
process (Cyert and March, 1963; Mintzberg and Quinn, 1991). Instead, strategic choice is the
product of the organization's dominant coalition, invariably senior management, and is based
upon its values, ideologies and personalities, and upon organizational power and politics. The
process invariably involves negotiation between senior management and other groups. The most
overt of these processes take place at shareholders' meetings. However, the most significant
negotiations generally take place between competing factions within management itself, over
such issues as the allocation of scarce resources, and are consequently much more difficult to
observe. Behavioural analyses of the strategy formulation see management values and objectives
as more than individual inputs to the planning process. They influence the way the environment
is perceived and hence the choice of opportunities and threats and the assessment of strengths
and weaknesses. Because of the bargaining processes involved, the outcomes of the behavioural
approach to strategy are likely to be satisfactory rather than seeking to maximize the result.

The incremental or emergent approach

This approach has much in common with the behavioural approach. Strategy is not a carefully pre-
pared plan with clear goals, but a process by which managers in the organization gradually come to
terms with the environment. Limited objectives are constantly modified in the light of experience and
through the process of negotiation between interested parties. As a consequence, strategies are con-
tinually being changed. The incremental approach has been put forward as a more realistic and more
effective method of dealing with complex and changing situations. The concept originated from
the work of Lindblom (1959) in an article appropriately titled 'The science of muddling through'.
Although his work was mainly concerned with large public sector organizations such as hospitals
and universities, there are strong parallels with larger private sector firms. Mintzberg (1990) has
sympathy with this perspective and sees many strategies emerging as opposed to being consciously
planned. This gives rise to notions of strategic learning as management builds up a repertoire of strat-
egies based on what has worked in the past while attempting to deal with the four parameters that
are said to govern modern business: uncertainty, ambiguity, paradox and chaos (Colonne, 2017).

An absence of strategy?
Finally, we present the view that strategy formulation is not a conscious management activity.
Strategy is not an issue when firms appear to be operating to the satisfaction of management. It
becomes an issue only in times of crisis when any attempt at strategy formulation may be too little
 THE STRATEGIC PROCESS 287

and too late. There may be several reasons for this. In some cases managers may have a simple
view of what the organization does. If it produces good quality, reliable products that sell and
make profit then there may be no incentive to develop a strategy ro do things differently. Porter
(1996) argued that apart from Sony, Canon and Sega, most Japanese firms lacked a strategy
beyond firms imitating and emulating each other. Japanese firms had grown in global markets
on the basis of operational efficiency through such approaches as lean production. However,
as global competitors adopted similar methods, the competitive advantage of the Japanese was
eroded. Porter's view was that such firms had no unique strategic position. Jr may be the case
that managers are complacent and reluctant to rock the boat or they may have myopic vision
and hence a limited view of options (see Levitt, 1960, and a discussion of the concept of 'market-
ing myopia' in Chapter 12). It may be that managers are too distracted by the daily business of
survival and see themselves too weighed down by resource constraints to contemplate strategic
options. In the last scenario, management becomes an endless round of firefighting with no time
for strategic contemplation. Perhaps we should also consider whether Porter's view is a product
of cultural imperialism and the short termism that dominates the US business landscape.
The various approaches we have identified reveal a mixture of rational and non-rational
approaches to the formulation of management strategy. Nevertheless, strategies are more than
management hunches played out in an information vacuum. More likely, managers select what
information is appropriate for their purposes, and this invariably involves consideration of both
environmental and organizational variables. Management values and organization politics are
important not only in the choice of strategy but in the selection of information upon which that
strategy is based. All six of the approaches we have identified may operate together in the same
firm. The following illustration reveals this mixed approach to strategic decision making.

Example of a mixed approach

Partners and office staff in a firm of solicitors have had problems with their computerized client
record and accounts system. The firm was one of the first to buy such a system, but the increas-
ing complexity of its expanding international business has meant that the software cannot cope.
One of the newer partners joined the organization from a rival firm, and he was impressed with
the system used there. He spends several months persuading his fellow partners that it may be a
good idea to change systems. The process of persuasion is accompanied by the gathering of infor-
mation to show the growth of the firm over the past few years and illustrations are well chosen
to show the advantages of the new system in terms of faster information retrieval and better
management information on the current status of client accounts. Information is also collected
on the cost of the proposed software and the hardware needed to support it. The office prac-
tice manager also presents information on the cost, strengths and weaknesses of rival systems.
Quotations are sought from IT companies with experience of installing such systems and in
servicing professional firms. The partners agree to go ahead with the proposal.
The above illustration reinforces the notion of strategy as both an intellectual exercise in
information gathering and presentation, and a political exercise involving values, power and
influence. In this case, the situation was a relatively straightforward investment decision with
implications for office practice. Strategic decisions to enter a new product market or change radi-
cally the structure of the organization involve far greater complexities.
Apart from these six approaches, we can identify three broad planning styles: formalized planning,
negotiation and consultation, and entrepreneurship (a similar model is offered by Mintzberg, 19736).
Figure 8.2 shows how these planning styles interact with the first five of the strategic approaches.
288 CHAPTER 8 STRATEGY

FIGURE 8.2 Approaches and styles of management strategy · · :<-

Approach o Style

Formalized Entrepreneurial Negotiation

planning and consultation

Rational X
Flexible X X
Creative X X

Behavioural X

Incremental X

The suitability of a particular planning style may depend on the size and nature of the firm.
For example, a formal planning system is more likely to be found in a large firm. Smaller firms
by their very nature will favour an entrepreneurial style, and a high degree of consultation will
be found in larger public sector organizations. Moreover, different styles may be appropriate for
different functions. While formalized planning may be a key feature of operations strategy, an
R&D strategy may benefit more from an entrepreneurial approach. Where trade union influence
is considerable, management may need to proceed more through consultation.
Both the approaches and styles may change over time. A university which has operated
through a mixture of an incremental approach and a consultative style may, when faced with
increased competition at the same time as budget cuts, need to operate in a much more entre-
preneurial way.

REFLECTION POINT
Using the approaches to strategy identified above consider the types of organization and the types of situation
where each of the approaches wou ld be more suitable than the others.
Consider the relationship with the management styles discussed in Chapter 6.

Strategic contexts
We have identified how managers may employ different approaches to the task of strategy for-
mulation. In addition, we can identify various contexts in which the strategic process operates:
• Strategy is not the sole preserve of the profit making organization. All organizations have
strategies, formalized to a greater or lesser extent. We can see strategies at work in such
diverse organizations as schools, the police, charities, football clubs and the church. In
recent years there has been a focus on management strategies in the UK public sector. For
example, some NHS trusts have recruited their managers from industry and commerce in
an attempt to introduce a more business like approach, including a greater emphasis on
strategy formulation.
 THE STRATEGIC PROCESS 289

• We may differentiate between those strategies pertaining to entire industries, strategies

employed by firms operating in a number of business markets, and strategies pertaining to
those operating in a single or restricted product market.
• We have already made the distinction between a corporate and business strategy. Acor-
porate strategy relates to the whole business, whereas a business strategy relates to a
specific product group or market. A multidivisional firm like Samsung therefore operates
both corporate and business strategies.
• We may identify strategies operating at different levels of the organization from broad
strategies at the top, moving through stages towards strategies for specific functional areas
like HRM or marketing, and finally to individual targets and budgets.

The uses and value of strategy

We can identify reasons for management to engage in strategy formulation:
• Strategy assists in the formulation of goals and objectives and enables them to be modified
in the light of information and experience.
• Strategy is a form of management control. It is a plan that guides behaviour along a
predetermined route. At the operational level it results in budgets and targets.
• A clear strategy both assists in the process of allocating resources and may provide a
rationale for that allocation so that it is perceived to be fair by organization members.
• It enables management to identify strategic issues that the firm may face in the future and
prepare appropriate action.
• Strategy performs a useful role in guiding the action of the constituent parts of the organ-
ization as well as acting as an integrating mechanism ensuring units work together. The
integrating power of strategy is a central feature of strong corporate cultures as illustrated
by firms such as IBM, Google and Apple.
• Leading on from that, strategy formulation can be an important element in the process of
social change. Strategic objectives are achieved by changing the behaviour of employees.
This is the essence of organizational development programmes used by such companies as
Shell and Fujitsu.
• The formulation of strategy is seen as a training ground for the development of future
managers.
We have already questioned the extent to which formalized strategy is used by firms. An even more
important consideration is the extent to which the existence of a formalized strategy contributes to
organizational success. There is mixed evidence on strategy and performance. There would appear
to be two problems. First, there is the difficulty of isolating and measuring the effect of strategy on
performance, be it return on investment (ROI), market share or some other criterion. A firm's finan-
cial and market performance, even over time, may be influenced by so many variables outside the
control of management that causal links between strategy and performance may be difficult to show.
Second, the relationship is complicated in that performance may well influence strategy rather than
the other way around. A firm that has been highly profitable may be stimulated into seeking invest-
ment opportunities either through product development or acquisition. Conversely, a firm incurring
losses may well be limited in its strategic options and have them determined by people external to
the furn such as bank managers or liquidators. In this case the firm's performance is the reason for
pursuing a divestment strategy, involving the closure or sale of the least profitable parts.
290 CHAPTER 8 STRATEGY

REFLECTION POINT ·· ·.:

What do you think is the most important use of strategy?

I ENVIRONMENTAL ASPECTS OF STRATEGY

I
In the last section we suggested that it was often difficult to establish a clear link between strategy
and performance because of the great number of influences at work. Much of that complexity
may be attributed to the firm's environment.
The firm's environment is, of course, a key aspect of our Business in Context model. In Chapter 1
we introduced the notion of contingency theory and the belief that a firm's performance was
dependent upon it achieving a strategic fit between itself and the environment in which it operates.
In Chapters 3, 4 and 5 we identified, with the use of selected examples, aspects of the business
environment. We suggested that these elements not only interact with business but with each other,
resulting, for most firms, in an environment that is complex and changing. In this and the previous
two chapters we have noted how that complexity is further complicated by the values of decision
makers and the internal structures and politics of organizations. The manager's task of making
sense of the environment is therefore a very difficult assignment.
We can identify two aspects of the environment that may influence strategy:
• There are those issues that affect all firms operating in a given business environment.
These are many of the issues we raised in Chapters 3, 4 and 5 and may include the state of
the economy, the labour market, changing technology, government policy, and social and
cultural influences. This is called the general environment.
• There are those factors that have direct bearing on the firm's competitive position, which
we will call the immediate competitive environment. An analysis of both these environments
will enable management to arrive at some assessment of the opportunities and threats
facing the organization.

The general environment

An analysis of a firm's general environment is sometimes known as environmental scanning, and
usually comprises some sort of assessment of environmental influences, how they interact with
the firm and with each other, and how they change over time. There are many difficulties with
such an analysis. Some managers tackle the sheer complexity of the environment by generating
masses of information . not all of which is relevant and not all of which is accurate. The use of
computers has incre"".:d the capacity for information handling and, in some firms, managers
can be submerged in ;:1 sea of data, much of which has only marginal relevance to their needs.
At the other extreme there are those who either ignore the environment or who have a blinkered
perception of the firm 's relationship to it. In such a situation trends can be missed, and the firm
either cedes opportunities to its competitors or is unprepared for changes when they occur.
Johnson et al. (2017) identify the problems with the environment facing all organizations in
terms of its diversity, complexity and speed of change. Of course, some firms operate in environ-
ments that are less diverse, less complex and where change, in some respects, is less rapid than in
 ENVIRONMENTAL ASPECTS Of STRATEGY 291

others. For example, a firm making chocolate products in the UK knows that peak demand for
its products will occur around Christmas and Easter and must gear up its entire organization to
meet those periods. However, seemingly simple and relatively static environments can change.
For example, a company that produced Christmas cards knew precisely that demand would peak
at the end of the calendar year and would have a good idea of the size of tha r demand. However,
the Christmas card market has become highly competitive, with many new entrants, including
charities, societies and of course online operations such as Moonpig. This will be further discussed
in Chapter 12.
The environment facing most organizations is dynamic, changing quickly and frequently.
Managers need to be sensitive to the environment and predict changes that are likely to occur.
The UK home computer industry of the 1980s was particularly dynamic. Sinclair was first to
launch a mass market personal computer, but failed to maintain product development. They
were swiftly challenged by Acorn's BBC Micro, and in turn buyers switched to Amstrad, which
itself was sensitive to, and even helped create, changing consumer needs and ushered in cheap
IBM compatible PCs. In such a dynamic market, household names quickly come and go. Busi-
nesses that fail in dynamic environments are generally those where managers have failed to see
the changes which are occurring or are either unable or unwilling to take appropriate action.
The case of professional soccer in England and Wales is one where an entire industry lost
ground to a variety of competitors for its customers' time and money, and the general trend
towards declining attendance and hence revenue seemed irreversible 20 years ago. The foot-
ball authorities tackled the problem, in part, by the creation of an elite Premier League and by
insisting on ground improvements for the top clubs, including the creation of all seater stadia.
A lucrative television deal for the Premier League was struck with a leading satellite television
company and the clubs imported stars from other countries. The result has been a turnaround
for the leading clubs, with capacity attendances for most matches, a corresponding rise in ticket
prices and a vast increase in profits. This in turn has led to a rise in wages and much greater
mobility among players. Increased mobility is a function of an EU ruling giving players freedom
of movement at the end of a contract, where previously clubs could demand a transfer fee. In
the main, clubs have had to make rapid adjustments to rising costs through increased prices and
the growth of selling club shirts and other products. Some of the larger clubs have shops of the
size of small department stores. Dynamic environments require more creative approaches to
strategy. However, there may be a danger that managers may respond unnecessarily to changes.
For example, some firms, when threatened by entrants offering much cheaper products in the
same market, respond by launching a cheaper version of their own product. This not only shows
a lack of faith in the quality of the firm's original product, but it will inevitably take sales away
from that product and have a potentially damaging effect on the firm's reputation.
Not only has the environment become more dynamic, it is also more complex in that different
demands are placed upon different aspects of the firm's operation. A firm producing a range of
products for different markets could be said to be operating in a complex environment. Most
firms in such situations reflect this complexity in their organizational structures. We saw in
Chapter 6 how the development of the multidivisional firm was a direct response to the problems
faced by emerging multinational corporations like General Motors in the 1920s. The problem
facing firms in a complex environment is the extent to which the complexity needs to be accom-
modated by organizational changes. Some firms attempt to reduce complexity by restructuring,
which may include selling off some units. Such action is a common feature of mergers and acqui-
sitions and will be dealt with later in this chapter.
292 CHAPTER 8 STRATEGY

We can see that most organizations face interconnected problems related to the degree of
change, the speed of change, the complexity of its environment and the corresponding complexity
of the organization. Managers tend to seek to reduce such uncertainty as much as they can by a
variety of measures:
• Uncertainty may be reduced by collecting relevant information. We have already noted the
problems associated with collecting accurate information and with information overload.
• As we saw in Chapter 3, managers will attempt to influence and control the environment.
This can be done by measures such as technological innovation, forming coalitions with
other organizations, political lobbying, acquiring raw material suppliers, retail outlets and
even competitors, and training staff in rare skills.
• Structures and procedures, such as planning and forecasting, may be set up to cope with
uncertainty. There are, however, dangers with setting up new structures. Specialist units can
lead to problems of cooperation and integration. In the early days of computing in business,
the creation of specialist groups of programmers and analysts led to tensions and conflict
(as identified in a classic study by Pettigrew, 1973 ).

The immediate competitive environment

We will attempt to locate a business in its immediate competitive environment using the model
devised by Porter (1980, 2008). Porter has identified five forces, which have immediate bear-
ing on a firm's competitive position. The forces he identifies are: the threat of new entrants; the
threat of substitute products; the bargaining power of suppliers and that of buyers; and competi-
tive rivalry. Porter argues that these five forces operate in every sector but vary in each case. They
tell us much about the industry structure and how the operation of the forces affects profit. We
explain and illustrate these forces in turn.

The threat of potential entrants

The threat of entry is often related to the ease with which a new business can establish itself in
the same product market. This is sometimes referred to as low barriers to entry. The relative
ease with which new restaurants emerge in large cities such as London and New York suggests
that the threat to existing restaurants is very real. However, the ease of entry means increased
competition and can result in a highly volatile market, to which the death rate of new restaurants
will testify. The closure of restaurants provides in turn opportunities to acquire premises with
fully fitted kitchens and the opportunity to acquire bankrupt stock such as furniture, crockery
and cutlery at bargain rates. Other sectors where there are relatively low barriers to entry include
estate agents and housing management services in the property market.
The threat of entry can also be high if new entrants come into the market with a strong brand
and a success in other markets. Porter (2008) cites the example of Apple entering the music dis-
tribution market. In a similar way Virgin has used its brand to enter a range of markets including
TV and media, mobile phones and financial services
The threat posed by potential entrants is reduced if there are barriers to entry. These can operate
in a number of ways:

• Equipment and associated capital requirements place burdens on investment and firms may
have to withstand considerable unit cost disadvantages initially. Such difficulties would
be presented to firms attempting to enter mass car production or oil refining. It would be
 ENVI RONMENTAL ASPECTS OF STRATEGY 293

difficult for newcomers to achieve sufficient economies of scale to recover their outlay in a
reasonable time.
• These difficulties can be increased where access to raw materials is an additional
problem.
• In some types of industry, breaking into a market is difficult owing to the considerable
customer loyalty to existing products and brands. A soft drinks manufacturer attempting
to launch a cola drink would have considerable difficulty persuading the market to switch
from Coca-Cola or Pepsi Cola.
• In the industrial components industry, getting customers to switch may pose the additional
difficulties of part compatibility and lack of standards.
• Such barriers may be compounded by the difficulty of obtaining access to channels of dis-
tribution. A producer of a new brand in the food and drink industry may have difficulty
persuading supermarket chains to stock its products. Getting supermarket shelf space is
especially difficult for small independent producers.
• Patents held by manufacturers can block those wishing to enter the market with
imitative products. Patents held by Polaroid posed difficulties for Kodak in entering
the instant camera market. This is also linked to the need for high investment in R&D
and where the need for high investment and existing patents have been particular
barriers to entry in the pharmaceutical market. Dyson have been particularly successful
in this respect, protecting their innovations and being fiercely litigious at any sign of
infringement.
• In a more general way the operating experience, which may include economies of
scale gained by existing firms over a number of years, can place the newcomer at a
disadvantage.
We should not forget that there are barriers to exit as well as barriers to entry. A large
manufacturing company with considerable operating losses, but with many employees and a
significant investment in plant and machinery, will undoubtedly face pressures to stay in busi-
ness. Such pressures will be related to the extent of the firm's assets, which may not be recover-
able if the firm closes. This fear of lost investment may only be one factor. Key stakeholders may
be particularly attached to the company, emotionally as well as financially, and place a high value
on its survival, despite market and financial evidence to the contrary. Pressures will undoubtedly
come from the local community and, in the case of some firms, from the national government,
fearing the effect of closure on local and national economies and on levels of unemployment.
The bank bailouts of recent years have in part been a result of such pressures and being viewed
by many as 'too big to fail', however, this is not always the case as will be seen in the Carillion
case in Chapter 9. Barriers to exit operate in small firms as well, where there is likely to be an
even greater ego involvement on the part of the owner-managers and a subsequent reluctance to
accept forced closure in the face of market forces.

REFLECTION POINT
Consider a range of businesses. What are the barriers to entry? How do they vary between the businesses you
have chosen?
294 CHAPTER 8 STRATEGY

The threat of substitution

A substitute performs the same or similar fun ctio11 as an industry's product by a different m eans.
(Porter, 2008)

The threat is greater where the substitute offers a real price or performance adv~ntage. Th e
cotton textile industry in Britain was not only threatened by cheap labour eco_nomies but al so
by the development of substitute products in the form of man-made fibres selli~g at a cheaper
price to cotton goods. The introduction of digital photography to replace film m camer_as wa s
the main reason for the bankruptcy of Kodak; the market for digital cameras also _declmed _as
cameras became a standard function on mobile phones. Rail travel in the USA declmed as air-
lines opened up local networks and assisted in the establishment of local airports_- The size _of
the country meant that air travel was perceived as a more effective means of cov~r~ng large dis-
tances. Distances are less of a problem in the UK, yet rail companies face competltlon from bus
companies competing on price. They also face competition from a growing network of local air
traffic competing on the basis of speed and comparative price. The travel business ha~ changed
significantly as high street travel agents have been replaced by online booking and an mcreasmg
willingness of travellers to book directly with the service provider. However, travel agents can
and do prosper by offering a service based on detailed specialist knowledge of a particular coun-
try and its travel and hotel networks.

REFLECTION POINT
Identify several products . In what ways and by what could they be substituted?

The bargaining power of buyers

Buyer power increases where there is a wide choice of suppliers offering the same or substitute
products, especially where there is little or no cost involved for the buyer in switching from one
supplier to another. For the industrial components industry, particularly where specialist com-
ponents are involved, the relationship may be different. There may have been a mutual accom-
modation of product changes over a number of years and such a strong relationship forged that
the cost of switching would be high. Components suppliers often invest time and energy building
up such relationships with commercial customers.
The buyer-supplier relationship is highly complex. The complexity of the technology plays a
major part, as does the competitiveness of the market. A mix of cultural and economic factors
can also be significant. As part of their normal business strategy, Japanese industrial firms rely on
subcontractors to supply components, and tend to build close relationships with these suppliers.
When Japanese firms moved into the UK they tended to locate in areas of low economic activity
and where government incentives were made available. This placed the Japanese in a strong bar-
gaining position to drive down costs.
The power of a buyer generally increases with the volume bought. This power can be exer-
cised in the demand for discounts or the expectation of preferential treatment in the supply of
goods. A factor to consider here is the relative size of the two parties. Buyer power normally
exists only if the volume purchased forms a high proportion of the selling company's total sales.
The larger supermarket chains like Walmart in the USA and Tesco in the UK have considerable
buyer power, particularly over the smaller food suppliers. The cost of special offers to super-
market customers, especially buy one get one free, is generally borne by the supplier and not the
 ENVIRONMENTAL ASPECTS OF STRATEGY 295

supermarket. In general, the stronger the bargaining position of buyers the greater their ability
to bring down prices and demand improved services. Profits are therefore transferred from the
supplier to the buyer. In certain circumstances, buyer power can be reinterpreted as consumer
choice. A restaurant in central London faces considerable competition from other restaurants
operating in that area. Buyers have a wide choice and switching is easy. In such situations the
product/market strategy of the restaurant becomes of utmost importance. Such strategies will
include considerations of product differentiation and quality, market segmentation, price and
promotion (Chapter 12 has a fuller account of these strategies).

The bargaining power of suppliers

The illustration of the bargaining power of buyers in the industrial components industry works
equally well for suppliers. In this and other cases, supplier power is stronger where the component
is specialized and few suppliers exist. Supplier power is also strong where the cost to the buyer
of switching allegiance would include costly product adaptations. A computer manufacturer
can gain additional market power where it develops popular software that can only be used on
its own machines. A case of supplier power in the computer industry emerged in the late 1990s
around the monopoly power of Microsoft, the creator of the Windows operating system for PCs.
The system is sold as the standard operating environment with most PCs and Microsoft has a
90 per cent share of the market. However, Microsoft came under criticism and was eventually
taken to court under USA anti-trust laws. The company was accused of abusing its monopoly
power in its attempt to control the market for access to the Internet via its web browser, Internet
Explorer. Porter (2008) describes the computer industry as the classic industry structure favour-
ing suppliers. Firms like Microsoft and Intel occupy monopoly positions, while, by comparison,
the computer manufacturing sector is split between a relatively large number of firms.
The power of suppliers can also be seen in labour markets. Those with rare skills or where
supply is scarce can command high salaries. University professors in business, finance and medi-
cine can command higher salaries than those in the liberal arts. This is particularly true in
American universities.
Most firms act as both suppliers and buyers and the bargaining power can be a two-edged
weapon. The cost of switching is also a factor in determining the relative power of buyers and
suppliers and also the threat of substitutes.

REFLECTION POINT
Identify a particular business. Assess the relative bargaining power of that business as both a buyer and
supplier.

Competitive rivalry
Competitive rivalry lies at the heart of Porter's model and is depicted by Porter as firms jockeying
for position. Particularly intense rivalry is found in such situations as a large number of competi-
tors of equal size, where the market has slow growth or where exit barriers are especially high.
Intense rivalry can be found among UK supermarkets, particularly those like Sainsbury's, Tesco
and Waitrose as well as the discounters such as Lidl and Aldi operating in the same general mar-
ket segment. Such companies employ staff whose sole job is to monitor the competition through
regular product and price checks. Intense rivalry in the IT industry often takes the form of poach-
ing staff and acquisitions such as that of Booker (a wholesaler to small retailers) by Tesco and
296 CHAPTER 8 STRATEGY

the possible takeover of Asda by Sainsbury's. Both of these moves are to strengthen and grow the
market position of the two largest players in the market segment. (Although currently owned by
Walman, Asda has continued to operate as a separate brand in the UK.)
Rivalry can be especially damaging if rival firms all attempt to compete on the same basis.
Porter (2008) sees price rivalry as especially damaging as it is easy to copy and dilutes profits.
On the other hand, product innovation or improving customer relations by improving delivery
times or offering a customized service can justify price increases even in highly competitive
markets.

Assessment of Porter's model

In a later reflection of his original work Porter re-affirms the value of his five forces model.
Industry structure as manifested in the strength of the five competitive forces determines the
industry's long-run profit potential because it determines how economic value created by the
industry is divided - how much is retained by the companies in the industry versus bargained
away by customers and suppliers, limited by substitutes or constrained by potential new
entrants.
(Porter, 2008, p. 86)

The strength of a model like Porter's is that it focuses on the immediate operating environment
of the business and avoids prescription by enabling managers to examine the forces acting upon
their firm. Porter also intended managers to consider how the forces might change over time. The
five forces model has been very influential. However, a number of questions have been raised:
• The analysis depends upon a level of knowledge about competitors, which may not be so
easy to obtain, as with competing supermarkets.
• As we have seen earlier in the chapter, the model portrays a rational approach to strategy
that may not match reality.
• The model sees customers as one of several factors, when several current approaches
elevate the customer to a more central role.
• Porter also views buyer-supplier relationships in terms of power and that they pose a
threat, when, in some industries, the prevailing trend is towards greater partnership and
long term relations.
• The model assumes that once the analysis has been made, an appropriate strategy can be
found. We have already noted that strategy is much more complex.
Managers can make use of Porter's model by establishing a position for their firms in the
market to maximize defences against competitive forces and, where possible, turn them to best
advantage. Porter identifies three generic strategies of particular advantage in this respect. These
are product differentiation, market segmentation and seeking to obtain the lowest costs and are
explored later in the chapter.

Environmental threats and opportunities

An assessment of the general environment and the firm's immediate competitive position should
enable management to identify the major threats and opportunities facing the firm. Table 8.1
gives an illustrative list of the environmental opportunities and threats using the elements of the
Business in Context model. This is usually the first stage in selecting appropriate strategic options
 ENVIRONMENTAL ASPECTS OF STRATEGY 297

and is a key part of SWOT analysis. For a firm like Orlake Records (Case 11.2), producing vinyl
records in a declining market, or a restaurant owner opening in central London, the threats and
opportunities may be very clear.

TABLE 8.1 Examples of environmental opportunity and constraints using the Business in
Context model, as they affect a small manufacturing firm
Aspects of the Opportunity Constraint
environment

Economy Market growth with increased demand Increased competition including

in the BRICs economies and in emerg- online plus difficult politics in
ing markets emerging markets
State Tax concessions for small firms New laws on health and safety requir-
ing the redesign of the product and
costly investment in changes in the
building and processes
Technology Substitute raw materials become High levels of investment needed to
available at low prices convert existing machinery to process
the new materials
Labour Local labour supply exceeds demand Labour shortages in key skills
together with a good supply of part together with the rising costs of hiring
time and contract labour labour with those skills
Culture and A community with a strong tradition of Labour market changes through an
institutions working for small firms influx of new firms and labour from out-
A tradition for hard work and com- side the region. Restrictions imposed
pany loyalty by local laws on expansion plans and
changes in working practices

However, we can identify several complicating factors:

• A threat to one part of an organization may represent an opportunity to another. Thus in
the 1970s, when the post and telecommunications services in Britain were part of the same
organization, a postal workers' strike led to increased revenue through telephone calls.
• Defending yourself against a threat or capitalizing upon an opportunity is a function of
both the firm's standing in its environment and its internal resource position. Survival in a
declining market may be easier if you have a large market share to begin with and raising
finance to invest in new products is often easier for larger established firms than the small
business. Small firms often face the particular dilemma of spotting a market opportunity
but lacking the resources to take full advantage. Even if smaller firms are successful they
face a backlash from established firms. For example, new entrants into the airline business
usually offer flights at lower prices. They can have difficulty expanding their market share
if the major airlines respond in kind or use their relationship with airports to prevent new-
comers gaining landing slots at major hubs by blocking them or running ghost flights of
empty aircraft in order to hold onto slots. In 2017 less than 1 per cent of slots were allo-
cated to new entrants.
298 CHAPTER8 STRATEGY

• ~1anagers differ in their ability to identify opportunities and threats. The management of a
furn doing particularly well in a declining market may ignore the longer term implications
of their position. Even when opportunities and threats have been identified, managers may
differ in their assessment of their relative importance and may develop different perspec-
tives, based perhaps on their attitudes to risk. Careful analyses of market opportunities
ma y come to naught in the face of a preference for inaction rather than entrepreneurial
risk taking. Failure to take action in the light of environmental change is one form of man-
agement myopia. Some managers can miss opportunities by perceiving the environmental
constraints as greater than they really are.
We can therefore see that the perception of an opportunity or threat is a subjective process. It
is partly for this reason that strategy formulation is as much a behavioural and political process
as it is analytical. There is another important point. We have tended to focus on the environment
as offering the management decision maker opportunities or constraints. A major contention
in this book is that the manager can influence and shape the environment. It is not simply the
analysis of the environment that provides the answer but the ability of managers to see more in
that environment than their competitors and in so doing create their own opportunities.

I ORGANIZATIONAL ASPECTS OF STRATEGY I

In this section we will explore the relationship between management strategy and the organiza-
tional aspects of the Business in Context model, and focus on issues related to an organization's
resources. We look in detail at the resource based view and follow up with a review of dynamic
capabilities, core competences, value chains and portfolio analysis. Organizational analysis is
traditionally an integral part of strategy formulation and serves a number of related purposes
for managers.
• Some kind of resource profile is needed to establish whether the various opportunities,
threats and management expectations can be met by the organization in its present state.
A knowledge of the resources an organization possesses, and what can be done with them,
is a prerequisite for determining future plans and establishes whether a gap exists between
what management would like to do and what they can do. This is sometimes referred to as
gap analysis. For example, the management of a manufacturing firm would need to know
if it could accept and meet a large order using its existing product range and its produc-
tion and labour capacity. A gap analysis would identify resources that might be lacking
and must be made good if opportunities are to be realized or threats are to be fought off.
The completion of new orders by the manufacturing firm may be dependent upon product
modification, purchasing equipment and hiring staff. This, in turn, may involve raising
finance and setting up programmes to recruit and train staff. Expansion of this nature has
further implications for the size of the supervisory, administrative and maintenance teams.
• The way resources are used by managers and how resource elements of the organization
link together can create competitive advantage. Examples of this include focusing on effi-
cient low cost internal systems or a niche market producer developing and maintaining
good customer relations. An internal analysis will enable managers to assess the attractive-
ness of the organization, its activities and its products in its current markets and assess their
potential for future investment. This is the particular contribution of portfolio analysis.
 ORGANIZATIONAL ASPECTS OF STRATEGY 299

A rather narrow, traditional view of strategic planning sees strategy as the result of environ-
mental analysis and the organization factors are seen either to faci litate or inhibit the chosen
strategy. Such a view runs counter to the contention of our Business in Context model, which
sees all elements as interacting ,,v ith one another. Organizational changes are brought about
by changes in strateg y, but strategic changes are also the product of aspects of the organiza-
tion. In this way strategy influences structure but structure can also influence strategy. We can
also see that expansion plans will undoubtedly build on strengths or core competences, a case
of the firm focusing strategy around a key resource, such as the skills of a particular group.
Organizations such as Unilever and P&G who own a multitude of brands, review these on a
regular basis to ensure that they are contributing as anticipated to the success of the business,
those that are not are divested. The divested businesses are often sold to specialist organiza-
tions such as Lornamead, who focus on milking the end of life or reviving the fortunes of
the brand. Lornamead's current portfolio includes former household names such as Vosene,
Yardley, Lypsyl, Stergene, Simple and Cydal.
We examine more general issues of strategy and organization before turning to the more
practical questions of resource analysis, core competences, value chains and portfolio analysis.

Interaction of strategy and organization

All the organizational elements of our model - goals, ownership, structure, size and culture -
interact with the process of strategy formulation.
The goals of an organization set targets for strategy to follow. We have also emphasized the
behavioural nature of this process in that both goal and strategy formulation are the products of
management values, and the processes of organizational power and politics, which have a major
influence upon management decision making.
The process of goal setting and strategy formulation is greatly influenced by ownership
variables. Professional consultants in partnership may each have their own views about the
growth of the firm, the recruitment and training of staff and so on. In a partnership these
views are generally resolved by discussion or through the dominance of a particular partner or
coalition of interests . The discussion of ownership and control in Chapter 6 showed that for
larger companies, with diffuse share ownership and professional managers, strategy formula-
tion was more complex and often dependent upon the influence of some shareholder groups.
There are numerous illustrations where small business owners may deliberately resist growth
strategies to retain personal control over the firm. However, the reverse is also true in that
strategies involving merger and acquisition affect patterns of ownership and control. Man-
agers may actively pursue acquisitions which give them more power and enhance their own
career aspirations.
We also noted in Chapter 6 that, according to Chandler (1962), structure followed strategy,
and this was a dominant feature in the expansion of American multinationals and in particular
the development of multidivisional structures. It was also suggested that strategy might be influ-
enced by structure. For example, a company with a large and active R&D department would
almost certainly pursue vigorous strategies of new product development. Burns and Stalker
(1966) studied the post-war electronics industry and saw differences in the strategic responses of
firms to changing market conditions. Those firms that had responded most effectively to chang-
ing market demand were typified by a more flexible, open structure, which they termed organic.
The firms that struggled in the changed environment and failed to adapt were by contrast more
300 CHAPTER 8 STRATEGY

bureaucratic, with often lengthy and inappropriate procedures for making decisions, and where
structural divisions between departments inhibited cooperation. Organizations, particularly
those in the public sector, which rely heavily on committees and working parties for the for-
mulation of important decisions, may find the process too cumbersome when a quick strategic
response is needed. In a similar way, participation, which can facilitate employee motivation
and commitment, may inhibit decision making through the inherent slowness of the procedure.
This, in part, accounts for the slowness of the decision making process in some Japanese firms.
In some cases structural change is so difficult that the disruptive effects may be counterproduc-
tive in achieving strategic goals. In other cases, strategic change in a highly competitive environ-
ment may only be possible with radical organizational change, which could involve replacing
the management team or selling off parts of the business, often only triggered by a crisis for the
organization.
Such considerations of structure are inevitably linked to size. In very large organizations
strategy formulation may be cumbersome due to the number of people and processes involved.
There is also a danger that strategy can become fragmented through the diverse nature of opera-
tions and locations. Another handicap of large size involves the control of a strategy once it
is formulated. The larger the organization, the more filters there are to interpret and perhaps
distort a central strategy.
An important element in the core management strategies of firms such as IBM, Southwest
Airlines, Hewlett Packard and The John Lewis Partnership is the creation of an organizational
culture, with an emphasis upon shared values. We have stressed the importance of management
values in both formulating and evaluating strategy. In this case the creation of a value system to
embrace the entire organization is seen by some to be more significant than strategy itself.

Resource onolysis
At the beginning of this section we explained the importance of the current resource position to
the formulation of management strategy. The resource based view developed by Barney (1991)
goes further and sees the way in which a firm uses its resources as a source of significant com-
petitive advantage. Resource analysis clearly covers physical resources such as land, plant and
machinery, financial resources and human resources. The analysis should also cover the key
relationships in the operating system. These exist between the firm and its suppliers and the firm
and its customers, as well as the relationship between parts of the same operating system. Barney
(1991) calls the latter organizational resources.
In many firms, resource analysis is accompanied by the use of a variety of accounting ratios
such as return on capital employed, profitability and so on. Different ratios have more relevance
at different stages of the firm's development than at others, so that while profitability may be
appropriate for established firms, productivity and sales may be more useful for newly estab-
lished companies and cash flows may be more significant when firms are in decline. A fuller
discussion of accounting ratios can be found in Chapter 14.
The value of resource analysis lies not only in assessing the viability of a strategic proposal
but also in assessing the ability of the organization to adapt to change. Can the firm deal with
changes in demand or can it withstand increased competition on a global scale? Has it the finan-
cial backing to invest in new technology? Do employees possess the necessary skills and is the
age profile of its staff sufficiently balanced to ensure succession? Competing through resources is
a dominant theme in the resource based view.
I STRATEGIC CHOICE I
Faced with a number of strategic options a manager must make a choice. We have already indi-
cated that the process involves consideration of several factors, which we may summarize as
follows:
• an analysis of environmental threats and opportunities
• an analysis of company resources and capabilities
• the stated objectives of the company and those of the management team
• the values and preferences of management decision makers
• the realities of organizational politics.
The options must be tested and evaluated for their suitability, feasibility and acceptability.
The suitability of a strategy would include such considerations as its ability to tackle problems,
improve competitive standing, and exploit strengths, as well as the extent to which it meets cor-
porate objectives. The feasibility of a strategy is the extent to which that strategy can be achieved
given the financial, physical and human resource base of the company. Even if a strategy is
both suitable and feasible it must still be acceptable to interested parties, such as management,
employees, shareholders and customers. As we have seen, stakeholders can be particularly sensi-
tive to strategies of acquisition. The acceptance of a particular strategy may also depend on the
attitude of senior management to risk.
The way a strategic choice is made will depend on the power and authority structure of the
organization. In some firms, the strategy may be highly detailed with little scope for interpre-
tation by functional managers. In other firms, a great deal of freedom is given to functional
management to develop appropriate strategies within broad guidelines. We deal with specific
functional strategies in Chapters 10-14. A theme stressed throughout is that R&D, production,
marketing, HR and financial strategies should achieve a high level of internal consistency, irre-
spective of where in the firm the strategy was formulated.
A factor often overlooked in the choice of strategy is its sustainability. This refers to the extent
to which the strategy will last and the extent to which it is difficult for others to copy. Such a
concept has much in common with the resource based view and with notions of core competence,
discussed earlier in this chapter. Product and process innovation can lead to a sustainable compet-
itive advantage that persists for many years, especially when protected by patents and trademarks,
322 CHAPTER 8 STRATEGY

as in the case of Rank Xerox. Toyota achieved sustainable advantage over rival car manufacturers
both within and outside Japan through continuous refinements in its system of lean production.
Coca-Cola's sustainable advantage lies in its secret formula and branding policies. However, the
history of strategic initiatives is littered with examples of non-sustainable advantages. An excellent
illustration of this may be found in the rivalry between UK supermarkets. Each chain rigorously
monitors its rivals so that any product and price advantage is quickly countered. All followed one
another to introduce petrol stations, cafeterias and loyalty cards, self-checkout, cashback and as
one announced diversification into financial services, it was followed quickly by the others.

CASE 8.2 ANHEUSER-BUSCH INBEV

Back in 2002, South African Breweries bought The secure a bottle supply at a time when glass was in
USA based Brewing Company to become SABMiller. short supply.
By 2007, SABMiller had overtaken InBev of Belgium The acquisition of a company in a major economy
to become the largest brewer by volume in the world . took place in 2002 when SAB paid US$5.6 billion to
SAB Miller was active in 60 countries with brands acquire Miller Brewing Company of Milwaukee. The
such as Castle Lager, Miller Genuine Draft, Miller Lite , acquisition offered a number of advantages to SAB .
Peroni Nastro Azzuro and Pilsner Urquell. In addition It gained premium brands such as Miller Genuine
to beer, SABMiller was also one of the world 's larg- Draft and Miller Lite and a direct presence in the
est producers of Coca-Cola under licence, as well world 's largest economy. It reduced the company 's
as other soft drinks . The major competitor InBev was dependency on emerging markets and on the rand
itself the product of a merger between the Belgian as its main currency. Now it was operating in a dollar
based lnterbrew and Brazil's AmBev. In 2008 InBev economy. The new company would give more clout
regained the top brewer spot through its acquisition for acquisitions, especially in Western Europe .
of Anheuser-Busch in the USA. By 2013 SABMiller As SABMiller, the company pursued its aggres-
was the world's second largest producer of beer by sive acquisition policy. It took a large stake in Colom-
volume and the largest brewer in terms of sales, with bia's Bavaria Brewery and in so doing became South
over 200 different brands of beer globally. In 2015 America's second largest brewer. Acquisitions were
SABMiller was swallowed by Anheuser-Busch InBev. made in North Africa, India, Holland, Argentina, Aus-
This complex web of acquisitions, mergers and tralia, Poland and China, although the company lost
cross shareholdings makes Anheuser-Busch InBev out to Anheuser-Busch in a major deal with the Chi-
the leader in beer sales with 28 per cent global sales nese Harbin Brewery. Nonetheless, in 2013 seven
in 2017 and now owns seven of the top ten most breweries were bought in China in a joint venture
valuable beer brands . with CR Snow Breweries , the Chinese market leader
South African Breweries was founded in 1895 as with 22 per cent of the Chinese market, currently the
Castle Brewery, producing Castle Lager to supply a largest market in the world by volume . Two years
growing market in the newly established goldfields earlier SABMiller was engaged in a highly contentious
around the mining town of Johannesburg. By 1902 hostile takeover of Fosters, the Australian brewer, with
the company was the most valuable non-mining 50 per cent share of the domestic market.
company in South Africa. In 1910 the Union of South Currently Anheuser-Busch InBev emphasizes a
Africa was formed as part of the British Common- number of strategic priorities :
wealth. The company expanded into Rhodesia (now
• expansion of global brands
Zimbabwe) forming Rhodesian Breweries. Over the
next 30 years the company diversified by acquiring • creating new customer experiences through pre-
a stake in Schweppes , and along with its rival brewer miumization and the creating of flavoured beers
Ohlsson's , created a joint venture to grow hops and particularly in high penetration markets
barley, thus securing important supplies . During • increasing affordability as a key to market pene-
World War I the company acquired Union Glass to tration and frequency of consumption particularly
in markets with low levels of penetration .
 STRATEGICCHOICE 323

CASE 8.2 (Continued)

In 2013 Anheuser-Bu sch InBev joined other lead- • to strengthen and expand the codes of practice
ing alcohol producers in a series of comm itments to for the industry, particularly with respect to the
reduce harmful alcohol consumption by: advertising of alcohol products

• reducing under-age consumption by encour- • commitment to not producing alcoholic drinks

aging governments to introduce and enforce with excessive amounts of added stimulants or
a minimum purchase age Also to produce to promote their alcoholic products as stimulat-
and disseminate educational materials ing or invigorating
designed to prevent and reduce under-age • to promote responsible drinking messages
drinking • to support anti drink driving initiatives .

The Anheuser-Busch InBev Family-Acquisitions, Mergers and Alliances

-----
Anheuser-Busch
InBev 2008

Grupo
InBev

I
Oriental
Brewery 201
South Kore

Harbin
Modelo
2012
Mexico
SABMiller

South
Brewery African
lnterbrew Foster's
China Brewers
2004 Group 2011
Australia 1947
Fujian Sedrin
Brewery 2006
Belgium Brazil -------, (China)

Brouwerij Brahma Bavaria

Artois 1988 1999 Brazil + numerous Brewery
Meantime
Belgium shareholdings 2005
Brewing
Piedboeuf Companhia in Argentina, Colombia
2015
Brewery 1988 Antarctica Paulista Bolivia, Chile, England
Belgium 1999 Brazil Paraguay, and
Uruguay
Labatt 2007
Cerveza Quilmes
Canada
2006 Argentina
Lakeport Brewing Co.
2007 Canada Cerveceria Nacional
Dominicana 2012
Bass 2000 UK
Dominician Republic
Whitbread 2000 UK
Becks

+ numerous joint ventures

+ stakes in overseas
brewers such as
KK and Zhujiang
in China

(Continued)
324 CHAPTER8 STRATEGY

CASE 8.2 (Continued) _-~ ·;?<f'ill

The company has not been without controversy Sources : Compiled from a variety of media and internet
sourc es (2017- 2018)
and has been criticized for anti-competitive behav-
iours . In 2015 the company was investigated for
acquiring beer distribution companies and then Questions
preventing them from distributing competitors ' prod-
1 To what extent do changes in the strate-
ucts. They were fined $6 million in 2016 for violations
gies of SAB, SABMiller and Anheuser-Busch
of bribery laws and for their attempts to silence a
InBev reflect changing economic and political
whistle blower. Perhaps the most blatant example
was their purchase of the entire crop of South African changes?
hops, thus making the hops unavailable to any craft 2 Was the acquisition of SABMiller a good thing for
brewer. Moreover this was not the first accusation of Anheuse~Busch InBev?
this type . Later in 2017 concerns were raised when 3 Is it healthy for one company to be so dominant
they purchased a stake in a beer rating (RateBeer) in a market?
website: surely a conflict of interest?

SUMMARY
In this chapter we have portrayed the formulation of strategy as a complex process involving environ-
mental and organizational factors as well as management values and organization politics . As a result,
the process is a mixture of rational techniques and subjective decision making processes, including a
consideration of management values and negotiations between interested parties.
• We have identified a range of approaches and styles , which may operate at the same time ,
although at different stages of the firm's development one type of strategy may be more appropriate
than another.
• The formulated strategy has several functions , not least of which is to anticipate the future by coor-
dinating activities and focusing resources towards chosen objectives .
• We note that the links between strategy and performance are difficult to prove.
• An analysis of the general environment and a focus on the immediate competitive environment will
enable management to identify opportunities and threats, although how these are interpreted is a
function of the values and creative ability of management.
• We identify four kinds of resource: product, physical , financial and people . All are important in
enabling management to formulate strategy around the organization 's strengths . These strengths
may be examined through an analysis of a firm's core competences and its value chain . Portfolio
analysis offers both an analysis of resources and an insight into strategic options .
• We examine a number of strategic options, and suggest that each option should be assessed in
terms of its suitability, its feasibility and its acceptability to managers, employees , shareholders and
customers .
 FURTHERREADING 325

I DISCUSSION QUESTIONS I
1 Examine the role of the scientific method in the process of strategy formulation . Is there a
place for subjectivity and creativity?

2 What is the purpose of strategy and how might a particular strategy be evaluated?

3 Identify the environmental opportunities and threats faced by a city centre restaurant, a
large retail store, a high street bank, a university and a firm manufacturing television sets.

4 Using Porter's five forces model, identify the specific competitive forces operating in the five
situations defined in the previous question.

5 In what ways can management use resource analysis and portfolio analysis to guide
strategy? What are the strengths and weaknesses of the models for portfolio analysis
identified in this chapter?

6 Assess the usefulness of core competences and the value chain in analyzing resources and
developing strategy.

7 Make a critical analysis of the different approaches to diversification.

8 Identify the opportunities and threats associated with a merger.

9 What strategic approaches, styles and options would best fit your college or your firm
for the 21st century? What problems do you foresee with these approaches, styles and
options?

I FURTHER READING I
There are several popular texts, all of which have features to commend them. An excellent cover-
age and good cases is provided by:
Johnson, G., Whittington, R., Scholes, K., Angwin, D. and Regner, P. (2017) Exploring Strategy: Text and
Cases, 11th edn, Pearson Education: Harlow.

A condensed version of the above focusing on key issues and techniques can be found in:
Johnson, G., Whittington, R., Scholes, K. Regner. P. and Angwin, D. (2018) Fundamentals of Strategy, 4th
edn Pearson Education: Harlow.
'
The following book covers much of the same ground but it approaches the subject in a slightly
different way. It has the added feature of including a number of classic journal articles:
de Wit, B. and Meyer, R. (2017) Strategy: Process, Content, Context: An International Perspective, 7th
edn, Cengage Learning: Andover.
326 CHAPTER 8 STRATEGY

A number of key articles can also be found in:

Mintzberg, H., Lampel, J.B. , Quinn, J.B. and Ghoshal, S. (2013) The Strategy Process: Concepts, Contexts
and Cases , 5th edn, Prentice Hall: London.

A different and interesting view of strategy is taken by:

Whittington, R. (2000) What is Strategy - And Does It Matter? Cengage Learning: Andover.

At a more specific level, a good analysis of the competitive environment is offered by:
Porter, M.E. (1980) , Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free
Press: New York.

The following contains an excellent summary of the above with updated examples:
Porter, M.E. (2008) 'The five competitive forces that shape strategy', Harvard Business Review,
January, 79-93.